As business systems have grown more complex and moved into a digital world, they’ve created more opportunities not only for fraud but also for uncovering fraud. It is my contention that auditing should be the number one reason for exposing fraud. And that requires a shift in mindset as well as the right techniques.
If we are to move forward in the fraud auditing profession, we must take a close look at where we are. We will do just that in this blog and the next two.
The Answers to Last Month's Trivia
What does a forensic person do for a living? Technically, forensic means offering evidence in a court of law. In many ways, the term forensic is misused.
What is the difference between a forensic accountant and a forensic anthropologist? The body of knowledge that a forensic accountant or forensic anthropologist uses to offer opinions in a court of law.
Which organization was the first broad-based forensic accounting board and credentialing organization established in the United States? American Board of Forensic Accounting.
Per the Tax Justice Network’s Financial Secrecy Index 2020, what are the top ten countries which are enablers of financial secrecy in the world? Cayman Islands, United States, Switzerland, Hong Kong, Singapore, Luxembourg, Japan, Netherlands, British Virgin Islands, and the United Arab Emirates. Are you surprised?
What is Kleptocracy? Kleptocracy is a government whose corrupt leaders use political power to expropriate the wealth of the people and land they govern, typically by embezzling or misappropriating government funds at the expense of the wider population. source: Wikipedia
Someone once said, “Life is like a circle, whatever you give will come back to you someday!”
In conducting research for this blog, I found an article Auditing for Fraud: Perception vs. Reality. It was issued at the Auditing Symposium XXII- 1994. The article states that:
“From ancient time until around the turn of the twentieth century, auditing’s primary objective was to detect fraud and the technique used was detailed examination rather than selective testing.”
The article does an excellent job of reviewing the history of the audit and the profession’s view on fraud detection. I would encourage you to read it.
The question is what has changed since then? In this and my next two blogs - yes to be continued -- I will discuss the current status of fraud in auditing in our profession. First, we will take a look at the good news & the bad news. Next, I will discuss fraud words and why they matter. Lastly, I will offer my framework for integrating fraud detection procedures into your audit.
State of the Union: Fraud Auditing
When comparing today to yesteryear, we need to acknowledge the differences. At the turn of the century, the auditor examined all transactions and all accounts. Financial records were all manual records and in paper format. Companies were more localized and not global. The primary purpose of an audit was fraud detection. Over time, our profession changed to an internal control-centric approach as a way of auditing in today's global environment.
Assuming life is a circle, I think our profession is slowly starting to recognize the concept of integrating fraud detection procedures into their audit. The change first occurred in 2002 with the issuance of SAS # 99, the title being Consideration of Fraud in a Financial Statement Audit.
I think the massive number of frauds that have occurred and were not detected by auditors has put pressure on the profession to change the standards, responsibilities, and most important audit methodologies. But I also believe our profession is still struggling with how to integrate fraud detection in today’s business environment.
Our challenge today is how do we provide the same anti-fraud assurance as in the 1900s, but in today’s business world? Hence the concept of fraud auditing.
The Good News
- The first good news was SAS# 99 issued in 2002. Instead of saying errors, irregularities, and omissions, the standard uses the fraud word. (Thank you, Joe Wells, for advising the auditing profession at that time.)
- In January 2019, the IIA published a position paper entitled Fraud and Internal Audit, assurance over fraud controls fundamental to success.
- In September 2020, the IIA issued the Internal Audit Competency Framework, which indicates that fraud is a knowledge area. They classify the knowledge into three categories: general awareness, applied knowledge, and expert knowledge. I would encourage you to read the framework.
- The auditing standards for auditing financial statements require auditors to include fraud consideration in their planning and audit programs.
- PCAOB is continually challenging the audit profession to respond to the risk of fraud.
- Numerous magazine articles discuss the difference between audit and investigation.
- Various professional organizations and various training companies offer courses entitled Fraud Auditing or similar titles.
- If you google “fraud audit,” the search engines provide a slew of topics and discussions regarding fraud audit. You will find the following topical headings among others: fraud auditing definitions; fraud audit meaning; forensic auditing; and the meaning of fraud auditing.
- Search YouTube and you will find various discussions regarding fraud auditing.
- College professors regularly issue scholarly articles on searching for fraud in the conduct of audits. They also issue articles citing reasons for audit failure.
- Technology companies are developing proactive software to identify fraudulent transactions on a real-time basis.
- I personally have written three books regarding fraud auditing. In 2011, I authored a book, The Fraud Audit: Responding to the Risk of Fraud in Core Business Systems.
- As a profession, we are recognizing the difference between searching for fraud in financial statements and companies’ core business systems.
- In 1993, Transparency International was created. The purpose of the organization is anti-corruption and crime prevention.
- ISAR, International Symposium on Audit Research, has a broad scope and includes research papers and panels dealing with all aspects of auditing and assurances.
You might think I am rambling, maybe I am, but our profession is also rambling with attempting to develop a methodology for fraud auditing. I need to stress; I used the word “methodology” rather than “standards & responsibilities.” The good news is that we are moving in the right direction.
Now the bad news
We are moving at the pace of a glacier.
The SAS # 99 implementation date was December 2002, yet we are still struggling with the intent of the standard. Rather than implementing a real understanding of how to integrate fraud detection procedures into our audit plans, we continue to use words offered by our profession that mitigate the responsibility of the auditor.
In my next blog, I will discuss the importance of word precession.
Fraud Trivia
(answers to be released in the upcoming blog)
- In which country is the Museum of Counterfeiting?
- As a revenue stream, what is the annual revenue of counterfeiting?
- Can tattoos be copyrighted?
- True or false? There are over 150 synonyms or antonyms associated with the word counterfeit.
- What is the most counterfeit product category?
- What is the most common form of wine fraud?
